Sunday, April 11, 2010

Has Germany (Really) Agreed To Unconditional Surrender Over Greece?

¹²Has Germany Agreed To Unconditional Surrender Over Greece? Not Yet, I Suspect

Ambrose Evans-Pritchard has covered world politics and economics for 25 years, based in Europe, the US, and Latin America. He joined the Telegraph in 1991, serving as Washington correspondent and later Europe correspondent in Brussels. He is now International Business Editor in London.

By Ambrose Evans-Pritchard, | 12 April 2010

Chancellor Merkel has already received fierce criticism in Germany for the bail-out. Events have moved on even since I wrote my column on Greece (in advance, ealier) for Monday.

The rescue package is greater than advertised earlier. It looks like €30bn in funds from eurozone taxpayers, and a further €15bn waiting in the wings from US, UK, Japanese, Chinese, Saudi and other taxpayers through the IMF. This is more than a bazooka, says Stephen Jen from BlueGold Capital.

It is the nuclear option. The sums of money are starting to look serious. Such funding is certainly enough to deal with Greece's immediate liquidity crisis, and therefore to buy valuable time for Credit Agricole, German Landesbanken, as well as Swiss and UK banks exposed to Greek debt.

Whether it can deal with Greece's deeper solvency crisis is another matter. What Greece needs is less external debt, not more. Simon Johnson, former chief economist for the IMF, says Greece's public debt may rocket to 150% of GDP by 2012. A deep slump caused by draconian austerity measures risks tipping the country into a self-feeding downward spiral. That is how debt dynamics metastasize.

IMF chief Dominique Strauss-Kahn said candidly, "the only effective remedy that remains is deflation. That will be painful. That means falling wages, and falling prices. There is no other way for Greece to become competitive. Greece has lost 20% to 25% competitiveness against Germany in recent years".

Can he really mean it? The Greek Left is likely to conclude that a better remedy is a controlled default (pre-emptive debt restructuring) along the lines carried out successfully by the IMF in Uruguay and the Dominican Republic, and so will many Greek citizens when they discover that the EU-IMF policy entails transfers to foreign creditors equal to 8% of GDP in perpetuity— much more than German war reparations after WW1, which could never be collected in full in any case.

"We learn from our mistakes," he said in an interview with Austria's Profil. Hopefully he has learned from Argentina, where the Fund damaged its own credibility by propping up a fixed exchange system that had already turned into a death trap. But I digress. On the rescue package I await a clearer signal from Berlin before coming to any conclusion.

This latest deal— like so many of other EU 'break-throughs' announced over the last two months, and then shown to be not quite what they seemed— came from Eurogroup chief Jean-Claude Juncker and the European Commission. The voices that matter are those of German Chancellor Angela Merkel, the Bundesbank, the finance committee of the Bundestag, and ultimately, the Verfassungsgericht, or German constitutional court.

This is a fast moving story. Details may become clearer by the hour. We are already hearing talk of possible "conditions" from Berlin. Mrs Merkel is being castigated by Free Democrats and Bavarian Social Christians— both coalition allies— for what looks at first sight to be a capitulation to French demands.

"We are standing on very thin ice, legally, economically," said Frank Schäffler, deputy finance spokesman for the Free Democrats. Die Welt reports that he is pushing for Greece's exit from the eurozone. "The German government buckled," said Karl Heinz Däke, head of the German taxpayers association. The headlines have switched from 'Iron Chancellor' to 'Frau Maus'. She will not like that.

Direct loans to Greece will require the endorsement of Germany's Bundestag, Holland's Tweede Kamer, and the Irish Dail— which will have to vote for fresh debt of €450m under Ireland's burden-sharing quota that it can ill afford. This will be no cake-walk. The rescue has not yet been activated. It has become firmer, but remains talk.

The moment it is activated, it is likely to face a court challenge from the eurosceptic professors in Germany for breaching the `no-bailout' clause of Article 125 of the EU Treaties. Germany's man at the European Central Bank, Jurgen Stark, has already paved the way for this by stating that Greece does not qualify for an emergency waiver of this clause because the country spent itself recklessly into its current predicament. This crisis was not an earthquake, an 'Act of God', or the result of an asymmetric shock. It was home-grown, long-coming, and long-predicted.

The Bundesbank has furnished them with ample ammunition by leaking an internal memo that slams the rescue as a threat to economic stability and a violation of the no bail-out clause. It said the joint EU-IMF operation would turn the bank into a "money printing machine" and "fiscal reflator". "Currency reserves from the Bundesbank cannot plausibly be made available for such purposes," it said.

The Latin and Anglo-Saxon media have underplayed or ignored altogether the importance of a challenge at the Verfassungsgericht. So have market analysts. There seems to be a collective failure to understand that certain things cannot be "fixed" by the usual methods of EU alchemy. I recommend reading the court's thunderous ruling on the Lisbon Treaty in June 2009, a cannon shot warning to Brussels and the EU elites that it will no longer be pushed around.

It states that the EU is "an association of sovereign national states (Staatenverbund)" and that states are "Masters of the Treaties" and not the other way round. The EU's fundamental order is "subject to the disposal of the Member States alone and in which the peoples of their Member States, i.e. the citizens of the states, remain the subjects of democratic legitimisation". It constructs a line of defence against infringements of German sovereignty, stating that certain fields "must forever remain under German control."

Read it and judge whether you think this court will let any German government disregard Article 125 of the EU Treaties, and allow Germany to be dragged illegally into an EU 'debt union' that profoundly changes the nature of Germany's role in Europe. George Soros is right to warn that any failure to bail out Greece will set off a "process of disintegration" for Europe. "The damage that a break-up would cause is so great that people will realize it, and they will pull back from the brink," he told the FT.

Who is `they'? Yes, Chancellor Merkel will pull back from the brink, perhaps the Bundestag will do so as well. But will the Verfassungsgericht?



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

No comments:

Post a Comment